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Exchange loss in cost plus method

15 June 2018

Hi,

We are a company who is 100% subsidiary of a Foriegn company. We do business only with our parent company and charge the entire cost of the month in Cost + profit method (Arms length price).

But they make the payments each month on the above, but what if we have exchange gain/loss on receipt of the amount. (revenue invoice raised vs the relevant receipt).

Do we charge that back to Parent company?

Request you to assist. Let me know for any further clarifications.

Regards,

Kumar

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4 Replies

A B Kundu (Professional) (1422 Points)
Replied 15 June 2018

You have to recognise the foreign exchange gain/loss immediately in the statement of profit & loss after realisation of the same.

Kumara Swamy.G (FINAL) (49 Points)
Replied 15 June 2018

Thank you Kundu for your reply.

My question is that whether I should charge the loss to my parent company again? Because we are getting exchange gain/loss with the only transaction i.e., the receipt of revenue Invoice raised against parent company.

I have given the exact example below. Can you please study it and answer my question please.

P&L for Month 1

Cost	100	Revenue invoice raised against parent company (100*115%)	115

Net profit	15
	115
Assuming 15% is the margin that we charge to Head office
Revenue Invoice amount received is 114 due to exchange

Alternative 1
P&L for Month 2

Cost	100	Revenue (101*115%)	116.15
Exchange gain/loss (115-114)	1
Net profit	15.15
	116.15		116.15

Alternative 2
P&L for Month 2

Cost	100	Revenue (100*115%)	115
Exchange gain/loss (115-114)	1
Net profit	14
	115		115

A B Kundu (Professional) (1422 Points)
Replied 15 June 2018

It is totally depended upon the agreement between the parent and subsidiary company whether the loss incurred by exchange fluctuation is to be compansated by the parent or not. The above answer given by me was as per the relevant accounting standard. Such standard doesn't deal with this type of transactions. If the parent company agrees, then the subsidiary can charge the loss amount with the next sale invoice. In that case, first the subsidiary has to book the exchange loss in the P&L and then that loss amount will be recovered in terms of sale.

In addition, I can suggest subject to approval of the parent company, to prepare the invoice in INR to avoid all these complications regarding forex adjustments.